Red Electrica Advances on Softer Blow From Reforms

By Patricia Laya -
Jul 15, 2013

Red Electrica Corp. SA (REE), Spain’s
electricity network operator, rose the most in three months in
Madrid trading on speculation that national power-market reforms
won’t harm sales as much as estimated.

The company forecast revenue from its transmission business
of 1.6 billion euros ($2.1 billion) next year, according to a
filing today. While that’s about 130 million euros less than
analysts had estimated, they’d previously expected a reduction
of 150 million euros, JPMorgan & Chase Co. said in a note.

Red Electrica jumped as much as 4.7 percent, the biggest
intraday gain since April 10, and was up 1.8 percent at 39.02
euros as of 12:43 p.m. local time. The stock slumped 7.5 percent
on July 12 after Spain’s government announced measures to cap
earnings from power distribution.

Prime Minister Mariano Rajoy is working to eliminate a
deficit in power-utility finances after successive governments
forced generators to sell electricity to consumers at below the
cost of production. The grid’s distribution unit will be limited
to a rate of return on investment of 6.5 percent, while
consumers’ power bills will rise, the government said last week.

Today’s statement from Red Electrica “will eliminate the
debate about substantially larger reductions in revenues near-term,” Javier Garrido, a JPMorgan analyst with an overweight
recommendation on the stock, said in the note. “While we await
more details on the definitive regulatory framework, today’s
statement should help limit the downside risk for the stock.”